Is World's Piggy Bank Running Dry?

December 11, 1994|By R.C. Longworth, Tribune Staff Writer.

As though we don't have enough to worry about, here's next year's crisis: The world is about to run short of money.

It's not that the money well is going dry. Instead, say many economists who have thought about this, there will be more demands for about the same amount of money. The upshot: a money shortage, with too little money to pay for all the things the world wants to do.

This will have two results. First, some worthy projects-a new highway in Russia, a new factory in Brazil, a new house in Bolingbrook-won't be built. And second, interest rates will keep going up.

The economists call this a "global capital shortage." If this sounds familiar, it's because capital shortages are one of those economic bugaboos, like trade wars, that seem to come around in cycles, generating headlines and frightening editorial writers.

Usually, these terrible things never happen, because the world economy is flexible enough to absorb almost any threat-one reason why some economists aren't convinced a capital shortage looms.

But sometimes crises happen. In 1973, an oil expert named James Akins, despite repeated false alarms about oil crises, wrote an article titled, "This Time the Wolf Is Really Here," predicting a dramatic increase in petroleum prices. He was right, and the world still hasn't recovered fully.

If the money-shortage wolf is finally at the door, it's mostly for cheerful reasons that prove that, in economics, every silver lining has a cloud.

In the last five years, about half the communist world has gone capitalist. The other half, mostly China, still calls itself communist but is behaving as if it is capitalist. At the same time, much of Asia, from Taiwan to India, has woken with a bang, in a burst of private industry and investment that is remaking the region.

But capitalism requires capital. The West cheered the death of communism without thinking about who would pay for what came next.

Poles building factories, Malaysians building power plants, Chinese building one of the world's biggest economies-all this added billions of dollars to demands for a pool of money that, pre-1989, was divided up mostly between North America, Japan and Western Europe, with some left for Latin America.

Actually, some economists predicted a big capital shortage in 1989 because of the huge sums needed to recapitalize and rebuild the communism-shattered economies of Eastern Europe and the Soviet Union. The same fear resurfaced in 1991, when it looked like rebuilding Kuwait would sap the world's treasuries.

Neither scare panned out-one reason why some economists view the current one with skepticism. The wolf didn't bite then, because the United States, Western Europe and Japan went into simultaneous recessions, reducing their needs for money. The rebuilding of Kuwait has not been that expensive, and investment in Eastern Europe over the last five years has totaled barely $13 billion, not enough to break the bank. The turmoil in Russia, Ukraine and other former Soviet republics has frightened away most big Western investors.

The demand for capital weakened to the point that U.S. interest rates hit a 30-year low last year without igniting inflation.

Why is the threat greater now?

- First, the recessions are ending. The American economy turned around several years ago and has been growing recently at an annual rate of about 4 percent. Germany, the other large European economies and Japan have shown signs of recovery this year.

These recoveries will boost business and consumer borrowing, putting pressure on the supply of cash. Untold billions also will be needed to build the infrastructure for the much-heralded information superhighway.

- Second, privatization has become the wave of the present. More than half of the economies of Hungary, Poland and the Czech Republic have been privatized, and most of the rest are on the block.

More important, privatization fever has gripped the Third World. Governments from Mexico to Indonesia to India to China are selling government-owned power stations, airlines and factories and are seeking foreign private investment to finance highways, railways and other projects.

The International Monetary Fund says the developing countries attracted about $12 billion a year in private capital in 1983-89. In 1990 to '93, that flow rose to $94 billion a year.

Now comes the flood. The World Bank estimates that Asian and Latin American companies will need $200 billion a year for the rest of the 1990s to finance these projects. Felix Rohatyn, the New York investment banker, says this figure is too low, saying $300 billion a year over the next decade is more like it.

Even Russia finally is becoming a magnet for money, according to David Hale, economist for Kemper Financial Cos. in Chicago.